Hamish McRae: German bailout patience wears thin

Hamish McRae

One of the country’s most respected financial journalists and commentators Hamish McRae is an associate editor of The Independent. He was named Business and Finance Journalist of the Year 2006 at the British Press Awards.

Don't blame it on the Germans. One of the distressing aspects of the eurozone's anguish, particularly evident now in Cyprus, is the way in which Europe's largest economy gets it in the neck for the failures of the very much smaller economies. However the Cyprus situation is resolved, and I do not think that whatever emerges now will be the final word on the subject, the tensions between northern and southern eurozone members will continue.

The Cyprus rescue is of course being botched. But without trying to absolve any of the principal players, including the EU commissioner Olli Rehn, the charge does not stick that if only the Germans would allow the eurozone authorities to increase the size of the support package, all would be well. Any fixed exchange rate regime is a tough master. It imposes an external discipline on its members' financial management in a way that no floating rate system can do. It is the nature of the beast and no fiddling with the terms changes things.

If you look at the plight of Cyprus from the German perspective, the only way forward is for countries to follow the rules. It is true Germany broke a crucial element of the Maastricht Treaty in that a decade ago it allowed a its deficit to rise above 3 per cent of GDP. It got away with it, as did France. There were no sanctions and so the notion that the eurozone's rules were objectives rather than hard limits was allowed to develop. But since that early transgression, Germany has behaved in an exemplary manner.

You can see one aspect of German self-discipline in the main graph. It shows the way in which the headline budget deficits for a number of European countries, including Germany, have been cut over the past four years. One striking thing is Germany's success at getting its deficit down virtually to a balance. Its draft budget for next year, presented just over a week ago, showed the lowest deficit for 40 years. It depends a bit on how you do the numbers but it is possible to show that were it not for the costs of bailing out weaker eurozone members the German budget would already be in surplus. I need hardly make the point about the contrast between what Germany has achieved and the dreadful situation inherited here by the coalition: the graphs speak for themselves. Any discussion of our own budget needs to be done in the context of that picture.

But while Germany is strong, its strength is not infinite, as Angela Merkel reminded the world recently. You can see what has happened to GDP in the small graph, together with the Ifo Institute business climate indicator, which gives a bit of a lead indicator for future growth. It looks as though GDP will have dipped into negative territory in the first quarter of this year but the slight uptick in the Ifo indicator suggested growth would pick up in the second half. That is probably right, but as you can see the very latest figures came down a little. At best Germany is managing only very slow growth.

Nor are Germans at a family level particularly wealthy. A new study by the Bundesbank last week showed the median wealth of a German household was only €51,400 (£43,865) after debts had been taken into account. Figures collected by the European Central Bank showed that in France the figure was €113,500, in Italy €163,900, and in Spain €178,300. These figures are distorted by the fact in Germany the median family does not own a home, whereas in other countries it would own one. Home owners in Germany are much richer. I suspect too that the number for Spain shows what a house was thought to be worth a couple of years ago rather than what it could be sold for today. But you see the point. Germans at an individual level do not feel particularly wealthy. They have had virtually no rise in living standards for a decade. And they pay a lot of tax: in west Germany they are still paying for the reconstruction of the old East Germany.

This leads to a debate about what, for want of a better expression, is German bailout fatigue. It is nearly three years since the first eurozone bailout, of Greece. The revised Greek package only just squeaked through the Bundestag last November. Even if Mrs Merkel wished to be more lenient towards Cyprus, which she doesn't, her hands are tied.

Bailout fatigue will be crucial in the months ahead. Once there is an outcome to the situation in Cyprus, and I think we should talk in terms of an outcome, not a solution, we will catch some sort of feeling about the willingness of the German electorate to carry on signing the cheques. There is a shorthand position here that holds that nothing much can happen until the federal elections in September and once they are out of the way, the new government will have more freedom of manoeuvre.

I'm not sure that is right. I think the fatigue is far too embedded to be dissipated by an election. The next government will be just as constrained as this one, maybe more so, for the elections will give a voice to those who believe that the entire bailout mechanism has been shown to be flawed. Not only do the Germans have to stump up but they are attacked for demanding modest changes in policy in return.

That leads to the most fundamental question. The costs of a bailout of Cyprus are tiny in terms of German public finances. So if we are seeing the limits of German willingness to support eurozone bailouts when the numbers don't matter, what will happen when the numbers do matter very much?

Somewhere, sometime the German electorate will draw a line. But none of us can know where and when.